EBITDA isn't as simple as it seems - Why does Buffett stay cautious, and why do investors still need to know?

Buffett Warns to Beware of EBITDA

Legendary investor Warren Buffett has expressed dissatisfaction with the use of EBITDA as a primary indicator for evaluating companies. The reason is that this figure can present an overly optimistic picture, which may lead investors to criticize incorrectly. However, why do investors at various levels continue to consider EBITDA?

The answer lies in understanding what EBITDA is, how to limit its use, and how to analyze it alongside other data.

What Is EBITDA Really?

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization — meaning profit before deducting interest, taxes, depreciation, and amortization expenses.

Essentially, EBITDA is the “cash profit from operations” of a business, used to see how much revenue a company truly earns from selling goods or services before paying various expenses.

Large companies like Tesla, SEA Group, and many startups focus more on EBITDA than Net Income because these companies are still in growth phases.

Why Is It Important to Investors?

EBITDA provides a rawer view — the company’s ability to generate cash from core operations, without considering financial management decisions, accounting policies, or tax situations in different countries.

Therefore, EBITDA is a useful figure for comparing companies within the same industry. For example, if Company A has a higher EBITDA than Company B, it indicates that A has a greater ability to generate operating profit.

But here’s the caution: EBITDA can be much higher than “net profit” because it does not deduct many significant expenses. Plus, if a company is losing money, EBITDA can still be positive.

How to Calculate EBITDA

The basic formula is:

EBITDA = Profit Before Tax + Interest + Depreciation + Amortization

Or alternatively:

EBITDA = EBIT + Depreciation + Amortization

Real Calculation Example

Taking Thai President Foods in 2020 as an example:

• Profit Before Tax: 5,997,820,107 THB
• Interest: 2,831,397 THB
• Depreciation: 1,207,201,652 THB
• Amortization: 8,860,374 THB

Calculation: EBITDA = 5,997,820,107 + 2,831,397 + 1,207,201,652 + 8,860,374 = 7,216,713,530 THB

This figure indicates that Thai President Foods generated approximately 7.2 billion THB from core operations before expenses in that year.

Where to Find EBITDA?

Most of the time, EBITDA is not officially listed in financial statements, but some companies include it in annual reports. For example, Minor International often clearly states this figure.

If the company you’re interested in does not report it, you can calculate it yourself using general financial data from the financial statements.

How to Use EBITDA Appropriately

EBITDA is best used for analyzing:

Debt Servicing Capacity — EBITDA divided by interest expense shows how many times the company can cover its interest payments; the higher, the better.

Industry Comparisons — Comparing similar companies’ EBITDA provides a fairly fair picture.

Short-term Analysis — It’s recommended to look at EBITDA over 1-2 years rather than long-term, because depreciation affects actual cash flow.

EBITDA Margin — A Better Metric

EBITDA Margin = EBITDA ÷ Total Revenue × 100

This metric shows “how much profit before expenses the company makes from every 100 THB of sales.”

A good EBITDA margin should be over 10%. The higher, the better, indicating lower risk.

How Is EBITDA Different from Operating Income?

Operating Income is “income from operations” or “operating profit,” derived from sales of goods and services, representing the core profit of the business.

Formula: Operating Income = Total Revenue - Operating Expenses

( Main Difference:

EBITDA does not deduct expenses like interest, taxes, depreciation, and amortization.

Operating Income deducts all operating expenses, including these figures.

In essence, EBITDA shows “how much money the business makes on its own,” while Operating Income shows “how much remains after paying key expenses.”

Cautions When Using EBITDA

) EBITDA is a manipulated figure.

Since some companies add back certain costs, EBITDA can be artificially inflated, creating a false image.

It does not reflect actual liquidity.

EBITDA ignores how much debt a company must pay or actual financial expenses. Therefore, a company with high EBITDA might have very little cash after expenses or even incur losses.

EBITDA does not indicate good management.

Expenses like interest and taxes are real costs — not optional. Smart investors should consider all these figures, as they reflect actual management performance.

Figures can be manipulated.

Calculating EBITDA involves some flexibility, so relying solely on EBITDA can be risky.

Summary

EBITDA offers a good perspective on a company’s “ability to generate cash” without being affected by financial management, taxes, or accounting policies.

However, relying solely on EBITDA for investment decisions can be risky, as it may hide the true financial health. Warren Buffett dislikes EBITDA for the same reason — it omits “liquidity” and “business reality.”

Proper approach: Consider EBITDA together with Net Income, Cash Flow, Debt Ratios, and other figures to get a comprehensive view of the company you are interested in.